Nigeria:
Funding For Start-Ups In Nigeria: Understanding The Concept And Legality Of Crowdfunding

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1. Introduction

Raising the required finance for a business especially start-ups
is usually somewhat of a conundrum. This is because the
conventional means of raising finance are not without their own
challenges – whether from family and friends which may be
unpredictable, bank loans which are fraught with high interest
rates, loans from cooperative societies, or personal savings. The
quest for ease of access to finance by utilising the internet (and
bringing the start-up owner close to the potential investor) has
led to the concept of crowdfunding, which refers to a practice of
raising money from a large number of people who each contribute a
relatively small amount. All of this is done via the internet.
Although crowdfunding is well legislated in many advanced countries
of the world such as the United States, Canada and New Zealand, it
remains largely unregulated in Nigeria. This article therefore
intends to revisit the concept of crowdfunding and discuss its
legality within the Nigerian legal system.

2. What is Crowdfunding?

Crowdfunding can be defined in several ways. Generally, it is a
method by which individuals or companies raise funds online from
the general public to finance a company or a particular
project.2 It may also be described as a process of
raising funds in the hope of turning "promising ideals"
into "business realities" by connecting investees to
potential investors.3 In the lay man's language, it
can simply be explained as a situation where the crowd (many
people) fund (pool resources for) a project for a return on
investment.

The history of crowdfunding is said to date as far back as
1700.4 However, crowdfunding in its modern state (taking
advantage of the internet) is said to date only as far back as 1997
while the term, "crowdfunding" was recorded to be first
used in 2006 by Michael Sullivan.5 In its modern
form, crowdfunding usually takes place on a website platform that
allows businesses or individuals to raise money, and investors to
provide the money.6 For an investment scheme to be
classified as crowdfunding, from the definition above, there are
some elements that must be present:

It must take place on a website platform; and

It must be an offer to the general public to finance the
company on a particular project, business or venture.

3. What are the various types of
Crowdfunding?

Understanding the concept of crowdfunding requires a discussion
of the various types of crowdfunding. Four types of crowdfunding
have been identified depending on what the person making the
contribution is expecting in return.7 The types of
crowdfunding are as follows:

Donation based crowdfunding – This is a type of
crowdfunding where people contributing persons (i.e. the crowd)
give money or other resources to the person or entity running the
crowdfunding campaign usually as a form of charity and with no
expectation of a reward. Example of donation-based crowdfunding is
contributing to a charitable cause using the GoFundMe
platform.

Rewards based crowdfunding – Under this type of
crowdfunding, contributing persons contribute to the project with
the expectation of obtaining a reward usually nonfinancial
benefits.8 An example of reward based crowdfunding is
donating to an artist's music tour where those who contribute
are guaranteed a free ticket to the event or receive the assurance
of obtaining a free gift.

Debt based crowdfunding – A debtbased crowdfunding is as
the name suggests. Here, contributing persons usually contribute to
the campaign or project with the belief that they will be paid back
as their contribution is seen as some sort of loan to the project.
Thus, the person running the campaign is essentially asking to
borrow money from multiple persons with the promise that they will
be paid back usually at a lower interest rate than the banks
provide.9 This type of crowdfunding is popular with
entrepreneurs who don't want to give up any equity in their
business.10

Equity based crowdfunding - Equity based crowdfunding is the
opposite of debt-based crowdfunding. Under equity-based
crowdfunding, the contributing persons are invited to contribute
funds to the project for a stake in the business, usually shares.
Contributors therefore become shareholders of the company and are
assured of returns eventually in the form of dividend. Should the
company do well, a contributor (now a shareholder) stands to make
profit. Equity based crowdfunding is big in the United States which
passed the Jumpstart Our Business Startups (JOBS) Act in April
2012.

This article will examine below, the legality of equity and
debt-based crowdfunding as an alternative to traditional funding by
investors as both donations and rewards-based crowdfunding are less
about investment. Thus, the term "crowdfunding", shall
for the later part of this article, refer to both equity and
debtbased crowdfunding.

4. Is it lawful to carry on the business of crowdfunding in
Nigeria?

Even though crowdfunding is gaining traction in other
jurisdictions outside Nigeria, the case appears to be different in
Nigeria. Section 67 of the Investment and Securities Act provides
as follows:

"67 (1) No person shall make any invitation to the
public to acquire or dispose of any securities of a body corporate
or to deposit money with anybody corporate for a fixed period or
payable at call, whether bearing or not bearing interest unless the
body corporate concerned is-

(a) a public company, whether quoted or unquoted, and the
provisions of sections 73 to 87 of this Act are duly complied with;
or

(b) a statutory body or bank established by or pursuant to
an Act of the National Assembly and is empowered to accept deposits
and savings from the public or issue its own securities (as defined
under this Act), promissory notes, bills of exchange and other
instruments:

Provided that nothing in this subsection shall render unlawful
the sale of any shares by or under the supervision of any court or
tribunal as may be authorised by law.

(2) If an invitation to the public is made in breach of
subsection (1) of this section, all persons making the invitation
and every officer who is in default or anybody corporate making the
invitation shall each be separately liable to a penalty of N500,000
in the case of a body corporate and N100,000 in the case of an
individualp>

From the above, it can be deduced that it is only a company
registered as a public company or a statutory body empowered to
accept savings and deposits that can invite the public to deposit
money with it. Thus, here a company is not a public company and is
not a statutory body or bank empowered to accept deposits and
savings, such entity is prohibited from engaging in the business of
crowdfunding.

On the other hand, it is interesting to note the definition of
collective investment scheme by the Investment and Securities Act
(ISA). The ISA defines collective investment scheme as "a
scheme in whatever form, including an openended investment company,
in pursuance of which members of the public are invited or
permitted to invest money or other assets in a portfolio, and in
terms of which- (a) two or more investors contribute money or other
assets to and hold a participatory interest in a portfolio of the
scheme through shares, units or any other form of participatory
interest; (b) the investors share the risk and the benefit of
investment in proportion to their participatory interest in a
portfolio of a scheme or on any other basis determined in the deed,
but not a collective investment scheme authorised by any other
Act."11

It can be argued that crowdfunding investment is a scheme in
pursuance of which the members of the public are invited or
permitted to invest money and in terms of which two or more
investors contribute money or other assets to and hold a
participatory interest. However, section 159 of the ISA goes on to
define who can engage in the business of collective investment
scheme. Section 159 of the ISA provides that:

"159 (1) No person may, unless registered as a
manager under this Act, include in or have as part of the name of
its business or in any description of his business any reference to
a collective investment scheme, open ended investment company, unit
trust or real estate investment and no person who is not registered
as a manager or trustee or custodian under this Act may perform any
act calculated to lead the public to believe that any business
carried on by such person consists of or is connected with the
administration of a collective investment
scheme."

In fact, section 159(2) goes ahead to stipulate that acting in
contravention of section 159(1) above is an offence and anyone in
breach of that subsection is liable to a fine. This means that
where an entity is not registered as a manager or a trustee or a
custodian, such entity cannot engage in the business of collective
investment neither can the crowdfunding business be classified as a
collective investment scheme unless it is registered by the
Securities and Exchange Commission (SEC) as a collective investment
scheme.

The provisions of the Companies and Allied Matters Act (CAMA)
appear to be more direct in prohibiting the business of
crowdfunding as it is stated in section 22 (5)(b) of the CAMA that
"a private company shall not, unless authorised by law,
invite the public to (a) subscribe for any shares or debentures of
the company; or (b) deposit money for fixed periods or payable at
call, whether or not bearing interest."

From the reading of the provisions of CAMA and the ISA, it
appears that a private company can only be authorised by law to
invite the public to deposit money for fixed periods or payable at
call, when such private company had converted to a public company
and therefore able to issue prospectus in accordance with the
provisions of the ISA.

5. Can an advertisement via a website be an invitation to the
public?

The Investment and Securities Act explains what an invitation to
the public means. Section 69 of the ISA states as follows:

69 (1) For the purposes of this Act, an invitation shall be
deemed to be an invitation to the public if it is an offer or
invitation to make an offer which is:

(a) published, advertised or disseminated by newspaper,
broadcasting, cinematograph or any other means
whatsoever;

(b) made to or circulated among any persons whether selected
as members or as debenture holders of the company concerned or as
clients of the persons making or circulating the invitation or in
any other manner;

(c) made to anyone or more persons upon the terms that the
person or persons to whom it is made may renounce or assign the
benefit of the offer or invitation or any of the securities to be
obtained under it in favour of any other person or
persons; (d) made to any one or more persons to acquire
any securities dealt in by a securities exchange or capital trade
point or in respect of which the invitation states that an
application has been or shall be made for permission to deal in
those securities on a securities exchange or capital trade
point.

(2) Nothing contained in this section shall be taken as
requiring any invitation to be treated as an invitation to the
public if it can properly be regarded in all circumstances as not
being calculated to result, directly or indirectly, in the shares
or debentures becoming available for subscription or purchase by
persons other than those receiving the offer or invitation, or
otherwise as being a domestic concern of the persons making and
receiving it.

(3) For the purpose of this section, the issuance of
any form of application for securities or of any form whatsoever to
be completed on the deposit of money with a company shall be deemed
to be an invitation to acquire those shares or to deposit
money. (Emphasis ours).

A number of things can be deduced from the provision of the ISA
above:

Advertisement via a website is an invitation to the public;
and

The issuance of an application form for deposit of money is
deemed to be an invitation to deposit money.

6. Conclusion

Equity and debt-based crowdfunding have been seen as an
alternative to the traditional ways of raising funds. In order for
Nigeria to continue to fulfil the mandate of its Ease of Doing
Business campaign, it is important for regulators to take an urgent
look at enacting regulations and guidelines that will govern and
provide adequately for the crowdfunding space in order to enable
private companies have easier access to finance than they currently
have.

Footnotes

1Brooks & Knights Legal Consultants (BKLC) is a law
firm established in Lagos, Nigeria to provide bespoke legal
advisory and policy consulting services to individuals, corporates,
government agencies and NGOs.

2 Some popular websites for crowdfunding include:
Kickstarter, Indiegogo, RocketHub, GoFundMe, Crowdrise, PledgeMusic
and CrowdFunder to name just a few; and there now appears to be a
crowdfunding initiative for diverse areas of business.

3 Piotr Pazowski, Economic Prospects and Conditions of
Crowdfunding, Management, Knowledge and Learning, International
Conference, 2014. available at https://ideas.repec.org/s/tkp/mklp14.html,
accessed on 3 July 2019.

5 In 2006, Micheal Sullivan coined the actual term,
"crowdfunding." He was an entrepreneur looking for
backers to help fund his video-blog project. Although
Sullivan's project failed, the term "crowdfunding"
was born.

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